As Lenders Struggle, Buffett Becomes M&A Financier

Dow Chemical agreed July 10 to take over the specialty chemical firm at a 74 percent premium over the previous day’s closing share price.

Pushing the transaction along was conglomerate Berkshire Hathaway, which is to become the chemical titan’s largest shareholder after putting $3 billion toward the Rohm & Haas buyout. In addition, sovereign wealth fund Kuwait Investment Authority put in $1 billion.

Buffett’s backing of Dow is the latest deal to tap into the Berkshire Hathaway wellspring. In April, the conglomerate lent $4.4 billion in debt financing to Mars for its $23 billion purchase of Wm. Wrigley Jr. Co, as well as buying a $2.1 billion minority stake in the chewing gum giant.

BB&T Capital Markets analyst Frank Mitsch was quoted as saying of the merger in The New York Times, “It’s going to be a challenging environment for Dow. It’s a heck of a premium, especially at a time when industry fundamentals are suffering.”

Morningstar analyst Ben Johnson told BusinessWeek that Dow Chemical’s takeover of Rohm & Haas is a “solid strategic move.” The purchase should help Dow make further inroads in the specialty chemical segment.

Dow Chemical CEO Andrew Liveris said on CNBC that in May Berkshire Hathaway had strong confidence in Dow Chemical stock, and that Buffett “noticed there was more value there than what the current price indicated.”

Wachovia, America’s fourth-largest bank, forced CEO Kennedy Thompson into retirement in June after the bank suffered major losses. Such corporate changes have become commonplace in the wake of the country’s housing slump. Merrill Lynch’s longtime CEO Stan O’Neal resigned in October after unveiling the company’s worst-ever quarter, and Citigroup chief Charles Prince met the same fate in November.

During 2007 Berkshire Hathaway was buying up shares of Kraft Foods, holding 8.6 percent of the company by the end of the year. Berkshire also had sizable stakes in pharmaceuticals company GlaxoSmithKline, Procter & Gamble, Anheuser-Busch, U.S. Bancorp and The Coca-Cola Co. as of end-year 2007. MarketWatch compiled a list of Berkshire Hathaway’s end-2007 shareholdings.

The Rohm & Hass buyout “is evidence that the smart money sees lots of value from M&A deals—especially transformative ones. … In order to compete on a global scale, there is a need for economies of scale,” writes Tom Taulli on BloggingStocks. But “it’s not easy to make such a transaction in a tough economic environment. Plus, Dow is paying a massive premium—thus setting a high bar for performance.”

“While the $23 billion paid for Wrigley represents a significant premium over its market value, the structure of the deal … also shows how the debt market has shifted to cause acquirers to back deals with more funds,” writes Mergers Unleashed.

BloggingStocks’ Tom Taulli writes that acquisitions are the hot investment ticket in the current market. A weak dollar has made U.S.-based stock an easy buy for European investors, as was the case in InBev’s purchase of Anheuser-Busch. Lower valuation and lesser market competition from private equity buyers are also playing into the trend.